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Down 9.8%: Is Masimo Corporation Stock a Contrarian Buy?

What happened

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Masimo Corporation(NASDAQ: MASI), a mid-cap medical technology company, reported stronger-than-expected second-quarter results after the bell Wednesday, but investors still decided to hit the exits en mass Thursday. Specifically, the company's shares fell by 9.8% yesterday on nearly three times the average volume.

So what

The really perplexing part of this downward move is that Masimo's management even boosted the company's annual revenue guidance by $10 million to $769 million during its second-quarter earnings release. Moreover, Masimo doesn't sport any major red flags -- such as unsightly debt levels or weakening product sales -- to easily explain this overtly negative reaction to the company's exceptionally strong second-quarter earnings report.

Now what

With demand for Masimo's noninvasive monitoring platforms continuing to grow at a healthy clip and the company's sales rising by double-digits as a result, this negative reaction by Mr. Market certainly isn't based on the company's near-term outlook. A deeper dive, though, shows that Masimo has attracted a fairly sizable short position over the past few months, illustrated by the company's last reported short ratio of 6.28.

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While it's not altogether clear what short-sellers might be seeing in this medical technology stock, one possible explanation is Masimo's top flight valuation. Presumably because of the company's rapid growth in recent quarters, Masimo's stock is currently trading at a price to sales ratio of 6.17 and a forward price to earnings ratio of 34.9. Both of these valuation metrics are well above average for a medical technology company. In other words, Masimo's valuation may be starting to revert to the industry mean -- implying that yesterday's sell-off might not be a buying opportunity after all.

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